Junk-Rated Companies In Good Shape – Moody’s

By Michael Aneiro

Junk bonds look expensive now, but it’s not because of any heightened credit risk among the companies that issue them. The default rate among speculative-grade companies remains below 2%, and Moody’s said today that its liquidity stress index has risen only slightly so far this year to 4.5% from 4.2% at the end of 2013. That index falls when liquidity for speculative-grade companies appears to improve and rises when it appears to weaken. Moody’s says liquidity problems, such as weak cash flow or a tightening covenant cushion, remain rare.

“Market movements and a sharp drop in issuance thus far in 2014 have not pressured the liquidity of US speculative-grade companies,” says John Puchalla of Moody’s. “Most high-yield corporate debt maturities are more than two years away, and companies continue to benefit from historically low interest rates and moderate US economic growth.”

Moody’s also said its covenant-stress index dipped to 2.5% in January from 2.7% in December. That index measures the extent to which speculative-grade companies are at risk of violating debt covenants, and it decreases when headroom under covenants seems to increase. It remains below both its record high of 17.3%, hit in March 2009, and its historical average of 6.3%, dating to 2002.

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